THE CREDIT CRUNCH has made raising financing more difficult but small-business owners are finding innovative ways to reel in extra cash.
Just ask day-spa owner Eva Sztupka-Kerschbaumer, who says she recently raised $30,000 in a single day. Her Pittsburgh, Pa., spa, ESSpa Kozmetika Organic SkinCare, needed a quick cash infusion when a $12,000 microdermabrasion machine and two $1,000 facial steamers conked out in April. However, the last thing she wanted to accrue was interest charges, so she didn’t go to a bank to raise funds. And to avoid missing out on future profits, she also didn’t tap a factoring company, which provides cash up front in return for a cut of her company’s future receipts.
Instead, she presold her spa’s services at a discount. She sent an email to her list of 8,000 subscribers and offered them free matching gift card on the purchase of any card worth at least $500. The advantage was clear. “This way I lock in my customer base, purchase equipment and get the cash flow,” Sztupka-Kerschbaumer says.
Of course, a matching gift card promotion may have undesirable consequences like providing discounts to customers who otherwise would have paid the full price and having less cash on hand when customers collect on their freebies. Still, if you’re in a bind and neither credit nor loans are an option, boosting your company’s cash flow can help bail you out, says Hermann Simon, chairman of Simon-Kucher & Partners, a pricing consultancy in Cambridge, Mass., and the author of several books on strategy, marketing and pricing.
Here are four other ways to raise (and save) cash quickly:
Offer upfront pricing
Another way to reel in cash fast is non-linear pricing — charging a higher price upfront with the promise of a discount or freebie down the road, Simon says. This method invokes the same basic idea as Sztupka-Kerschbaumer’s gift cards: using the customer’s affinity for a deal to guarantee future business. An example is a train ticket that is costly upfront but becomes less expensive with more use. “Customers like [this strategy] because [an item or service] becomes less expensive as they use it more, and businesses like it because they get cash up front,” Simon says. By charging a fee before services have been rendered, you’re able to apply that cash to growing your business — or just keeping it afloat.
Discount items, sometimes
Selectively discounting products or services can be more lucrative than offering a blanket discount on all your firm’s entire catalog, Simon says. Consider a restaurant discount promotion. A buy-one-get-one-free coupon without limits might be redeemed on a really busy day, overburdening the staff. Or worse, a restaurant might have to turn away customers who would have paid full price. Instead, add some restrictions to your discounts, he says. For instance, require a minimum purchase or specify particular times or days when discounts can be used.
Consider purchase money financing
If cash is tight, suppliers may allow you to sell merchandise before you pay for it, says Charles Thomson, in-house counsel for the Doall Company, an industrial supplies and machine tool distributor in Wheeling, Ill. Using so-called purchase money financing (basically, seller financing), borrowers give their vendors a Purchase Money Security Interest (PMSI), a lien against goods that the vendors agree to send your business. Once the items sell, the vendors will receive payment. Many vendors agree to this deal because they want to keep you as a customer and because the lien on the new goods trumps all other liens in a bankruptcy proceeding, Thomson says.
Switch from fixed to variable costs
When possible, turn fixed costs into variable costs, says John Evans, a tax partner who specializes in small businesses at BDO Seidman, an accounting firm in New York. Variable costs may be lowered in tough economic times. For instance, instead of paying thousands of dollars for your own computer server you could use a hosted service, such as Hostway or Network Solutions for a monthly fee. The benefit of going this route is that you can more readily adjust your expenses in a volatile business environment. Variable costs often shrink when employees are laid off or production levels dip, Evans says.
—Write to Diana Ransom at firstname.lastname@example.org
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